PoS Advantages Bitcoin Enthusiasts Often Forget
PoS, or Proof-of-Stake, is an algorithm that achieves consensus by requiring participants to stake a number of their tokens for an opportunity of validating blocks of transactions. As a result, validators get rewarded for it.
With some similarity to PoW (Proof-of-Work), PoS differs from it in fundamental ways. For instance, PoS protocol implies that the miner of a new block is chosen in a semi-random, two-part process, where the first element to be considered is a user’s stake. The more you stake, the better your chances of being selected for block validation. If your transaction vote is aligned with other miners — you get a block reward. Otherwise, your stake is lost.
There are many Proof-of-Stake implementations, most notably are Delegated PoS proposals, used by BitShares, EOS, and Steem. The PoS protocol is also utilized by such digital currencies like Blackcoin, Peercoin, and Nxt. Ethereum is planning to switch to it in upcoming Casper upgrade. By the way, FOIN uses it from the very start.
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Key Advantages
Below is the list of reasons why PoS is widely regarded as one of the best consensus algorithms.
1) Energy Efficient
The technology of PoS algorithms assures energy efficiency, especially compared to PoW, by getting away from the energy-intensive mining process.
2) Affordable for Users
Being less energy consuming, PoS system allows more users to participate in the mining process. Nice mining hardware can cost a miner up to a thousand dollars. Besides, they need to calculate the costs for cooling, electricity and other expenses when they start to participate. With PoS, you do not need any special hardware and only have to buy more coins to take part in the process.
3) Decentralization
Large mining-pools can control a majority of PoW-based networks, which means a threat of centralization. It is a result of the exponential increase in reward per investment on PoW systems, contrary to the linear increase on PoS systems.
4) Security
To attempt a 51% of attacks on the PoS system, the attackers would have to put their assets (a stake ) on the line, which is a big deterrent. For comparison, in case of the PoW system, they won’t lose their hardware when attempting the same attack.
Main Disadvantages
As every consensus algorithm, the PoS protocol has its disadvantages, among them are:
1) Weakness against Malicious Intentions
Any participant who is staking coins may very probably have malicious intentions. For instance, a user may vote for both forks of the blockchain. It would then be an extremely undue advantage if a validation mechanism is not present.
2) The Likelihood of an Oligarchy
PoS system opens the ability to monopolize the entire network for its users. When a network node stakes large amounts of coins at once, it’s revenue increases. Then the revenue can be spent to buy and stake more coins. This creates a positive feedback loop that brings the network to the same state as an endgame of a board game “Monopoly”. To prevent this, users will have to rely on the majority of big coin holders to be altruistic, which might not work out perfectly.
3) Nothing-at-Stake
It means that an attacker has every chance of starting to expend nonexistent resources and create an alternative blockchain with a longer chain of blocks. With the support of other miners, the attacker can carry out “double spending” and reject certain payments.
PoS Advantages You Probably Did Not Consider
Although there are Bitcoin maximalists and crypto-anarchists who promote a stateless society where a “code is the law,” the open-source Bitcoin community has well grown in size. It now includes countless HODLers and novice traders who dream of profits or owning a bit of the future. This also implies an asymmetry for participants who are sole consumers, and those actually supporting the network.
Notably, one can be a voluntary node even without mining Bitcoin. The process will still contribute to your electricity bills, but strengthen decentralization in return. Well, it happened that not so many people are interested in it. Not talking of developer interest; Bitcoin is an exception in the series of attempts to remain active fueled purely with enthusiasm. Here is a hint: rarely are open-source initiatives better incentivized than the private ones. Yet.
PoS system favors those who already have a significant capital: 100x more assets at stake equals a 100x higher chance of being selected. It means that the more you stake, the more money you risk to lose. Therefore, the participants are supposed to be more attentive to the network a stake in which they own. It will also drive faster and more deliberate changes to the protocol opposed to more common PoW projects most of which are mutated clones of Bitcoin.
Once again, the general public is not ready for complete responsibility of the network, including the provision of security for own wallets. For the network to succeed and improve in the long run, the PoS protocol is more favourable.
Conclusion
Blockchains based on pure PoS consensus mechanism may face problems regarding its certain features. Luckily, there are enhancements and alterations like Delegated Proof of Stake or Hybrid PoS and PoW that solve the issues associated with both PoW and PoS protocols. While still under development, this protocol unleashes the biggest and most realistic potential, specifically for the projects in the financial industry.
You may also like to read our article about two types of crypto storage solutions. Facts and comparison in convenient table form.
Originally published at https://fopay.io on July 2, 2019.
